Passing the torch: Is internal succession better than sale?

If you had to exit your business tomorrow, would you sell it externally or pass it on?

We asked a large group of financial advisers if they were looking to exit now, how would they do it? The overriding response was – external sale.

When we asked them what they’d want to do if they were going to sell in 10 years. Three-quarters said – internal succession.

So why don’t more owners go down the Management Buy Out (MBO) route? The truth is, it takes proper planning and significantly more time to prepare.

But for those willing to dedicate the time and effort, it can offer the best outcome for your clients, your staff and your legacy.

Here’s why.

4 key benefits of internal succession (Management Buyout) compared to an external sale

1. A better chance of retaining clients – Your clients already like your team, your proposition and the way you do business. It’s great news for them because very little is changing. So, they’re much more likely to stick around than they would be in a more disruptive external sale, which normally involves a new company name, service proposition and even pricing model. The result – you’ve got a much better chance of getting the full buyout amount.
2. Maintain professional connections – Most firms have a network of professional connections who introduce clients (think solicitors and accountants). An MBO gives you the chance to gradually hand over those relationships to your successors and keep the flow of new business going.
3. Strong commitment and loyalty – If your successors have been involved in the business for many years, possibly even built their careers in the firm, they will be bought into making the transition a success. We’ve seen successors agree to do “whatever it takes” to ensure the seller is put right because they’re so grateful for the opportunity.
4. A gradual handover – It can be hard to stop work abruptly. With an internal succession, you can control your exit timeline, gradually stepping back as your successors take over. For many, an ambassadorial role can be a nice glide path to retirement.

4 common challenges of internal buyouts

So, an MBO sounds pretty great, right? But it’s not all gravy. Here are 4 potential challenges you should understand before embarking on this path.

1. Longer exit timeline – It’s unlikely that your leadership team has sufficient personal funds lying around to buy your shares outright. This either means they have to source external funding (loan or private backer) or, as is more likely, you’ll get paid out from business profits. An external sale will normally see all payments made within 3 – 4 years. From an MBO, you might be looking at 10.
2. Gaps in leadership skills and experience – Being a financial planner or a manager, and owning a business, are two very different things. We’ve seen plenty of MBOs where the successors weren’t ready to run a business. The result? The owner is still slogging away for years, with profits not supporting payouts. You’ve got to give your team the skills to be business leaders before you start the process.
3. More risk – If your payout is being made from business profits, it is heavily dependent on the commercial success of the firm. Market downturns, global events or just bad management might mean your payout is at risk or could take a lot longer than you anticipated.
4. Tax implications – Most share sales qualify for Business Asset Disposal Relief (BADR), which could reduce the rate of Capital Gains Tax you’ll pay on qualifying gains up to £1 million. There’s a chance that the way payments are structured could mean you lose this benefit. Always seek professional guidance before structuring a repayment plan.

Early preparations are essential for a successful Management Buyout

If you’re even thinking about an internal succession, you need to start planning right now.

Remember, you’re not just selling a business; you’re building a leadership team to carry on your legacy, and that takes time.

Not sure if your business is ready to start the MBO process? We can tell you in just 7 days. What’s more, if your business isn’t ready, we can roll up our sleeves and help you get it sorted.

The best place to start is having a free, confidential chat. Email hello@melo.co.uk or call us on 0113 4656 111 to start your succession story.